The most common credit card mistakes include not choosing the right card, missing a payment and even applying for too many credit cards. Credit cards can be tricky and it’s common for people to make these mistakes when using them. The key is to learn from these mistakes and to avoid making them again. With that in mind, we’ve compiled a list of the most common credit card mistakes to help you learn from the missteps of others. So read up and find your way to sturdier financial footing.
Types of Credit Card Mistakes
- Card Selection
- Credit Building
- Fees
- Spending & Payment Habits
- Debt
- Identity Theft & Fraud
- Small Business
- International Usage
Most Common Credit Card Selection Mistakes
Not Having a Credit Card
Credit cards can lead to problems when misused, including credit score damage and unsustainable debt, but that is no reason to avoid them entirely. Credit cards are by far the most accessible and effective credit building tool available to consumers, since you don’t have to incur any debt or make any purchases in order to add positive information to your major credit reports. As a result, if you’re unsure about your ability to spend responsibly, just lock your card in a safe or even cut it up.
Applying for Multiple Cards at Once
Each time you apply for a credit card, your credit score takes a slight hit, the effects of which last about six months. This should not discourage you from opening a card if you need it; you just don’t want to go overboard – especially soon before you’re going to need a polished credit score (see below).
Opening a Credit Card When You Need a Good Credit Score
Since opening a credit card causes slight credit score damage, you should avoid doing so within six months of applying for a loan or buying a car.
Getting the Wrong Type of Credit Card
While many people get distracted by rewards, rewards cards aren’t right for everybody. If you have credit card debt, get a credit card that has an intro 0% APR on balance transfers. If you’re planning a big ticket purchase, find a card offering an intro 0% on new purchases. If you have limited or bad credit, get a credit card that’s geared towards helping you build credit. Only if you do have above-average credit and you pay your bill in full each month should you really worry about rewards.
Similarly, you should only get a travel rewards credit card if you fly at least 30,000 miles each year or spend at least 20 nights in hotels. This ensures that you will be able to efficiently accrue rewards as well as redeem frequently enough to avoid rewards devaluation. If you can’t meet one of those benchmarks, get a cash back credit card with the rewards structure that best suits your spending habits.
Mistaking No Preset Spending Limit for a Limitless Credit Line
Many people think NPSL means that a card has no limit. However, all it really means is that a card’s spending limit is determined on a month-to-month basis and that the issuer will not inform you or the major credit bureaus of exactly what it is at any time, thereby creating the potential for your card to get unexpectedly declined and for your credit score to fall because of deceptively high credit utilization.
Thinking College Students Can’t Use Credit Cards
The CARD Act has confused a lot of people into thinking that most college-age consumers cannot use credit cards. They believe the law requires you to be at least 21. That’s not the case, however, as you can get a credit card at 18 as long as you can prove you have enough independent income to cover a card’s monthly minimum payment. This gives college students the opportunity to start building credit early.
You can check out our editor’s picks for the Best Credit Cards for College Students to see what offers there are for students.
Most Common Mistakes When Building Credit with a Credit Card
Paying to “Repair” Your Credit
There really is no quick fix to credit building, no matter how much or whom you pay. The companies that advertise fee-based credit repair services are merely attempting to capitalize on financially desperate individuals and will do no more to improve your situation than you can do by yourself. The best approach is to save your money, check your credit reports for errors, pay down debt and begin to funnel positive information into your major credit reports in order to devalue past mistakes over time.
Thinking You Must Make Purchases to Benefit
Credit scoring agencies value low credit utilization as well as consumers who do not spend beyond their means. Therefore, as long as you maintain a credit card at zero balance and in good standing, your credit score will benefit.
Using the Wrong Credit Building Credit Card
If improving your credit standing is your goal, you should focus on getting a credit card with the lowest fee structure possible, including no fees for account inactivity. This will prevent credit improvement from becoming a cost-intensive endeavor and will allow you to lock the card in a drawer if you so choose. Neither interest rates nor rewards should be a priority because rewards typically result in higher fees, and you should instead try to pay your balance in full each month.
Keeping a Small Unpaid Balance to Curry Favor with Lenders
For some reason, many people believe that carrying a small amount of debt garners the favor of their creditors because it allows these issuers to earn profits from interest. This is untrue, however, as carrying a monthly balance simply increases your costs.
Paying for Your Credit Score
There is no reason to pay a company for access to your credit score. For one thing, more and more financial services companies, including WalletHub and major credit card issuers, are offering free credit score access.
Plus, you don’t need to worry about your credit score as long as you have your credit report. We are all entitled to a free copy of our major credit reports every 12 months, and this will have all the information you need to determine where your credit stands. After all, credit scores are based on the information in credit reports.
Most Common Credit Card Fee Mistakes
Paying Foreign Transaction Fees
Credit card companies often charge fees of 2% -4% for each purchase you make in another country. While these fees can lead to high costs, they can be avoided if you have a no foreign transaction fee credit card.
Paying Too Much in Balance Transfer Fees
Consumers often become so enamored with 0% balance transfer offers they forget there’s often a fee associated with them. Both interest rates and balance transfer fees impact the financial benefit of a balance transfer, so you must consider them in combination.
Paying Cash Advance Fees
Cash advances are costly, typically triggering a fee in excess of $10 – the average is currently the greater of 3.87%. You’ll also get hit with an interest rate of 20% - 36% – the average is currently 24.81% – which begins accruing immediately. That’s why you should never do a cash advance. Instead, get either a debit card or a prepaid card that offers free or low-cost ATM withdrawals, and avoid situations that might require you to spend more than you have.
Not Factoring Fees Into Potential Savings From Rewards
Many of the best rewards credit cards charge fees in order to pay for the value they provide to cardholders. Such cards can still wind up easily paying for their fees and much more, depending on your spending habits. Either way, paying this type of fee isn’t necessarily a good or bad idea; it all depends on what you’re getting for the money.
Opting in for Overlimit Fees
While over-limit fees were once typically $39 and a thorn in the side of consumers who didn’t keep a close eye on their credit utilization, the Credit Card Act of 2009 has virtually eliminated this type of fee from the market, according to a report by the Office of the Comptroller of the Currency.
Cardholders must now actively opt-in for the ability to spend beyond their credit line, and overlimit fees must be proportional to the amount by which the spending limit was exceeded. Still, incurring such fees is a mistake for the average consumer, except for in emergency situations, given the expense involved and the ease with which the situation can be avoided with a bit of planning.
Paying Late Fees
The average late fee is $33.98. Late fees are an unnecessary expense, considering you can avoid the fees by setting up automatic monthly payments for at least the minimum amount due. Late payments may also lead to credit score damage.
Most Common Credit Card Spending & Payment Mistakes
Missing Your Due Date
Missing payments is one of the most problematic and easily correctable issues facing credit card users. It will cost you in terms of late fees, interest payments (given the loss of your grace period), and eventually credit score damage. All you need to do is set up automatic monthly payments from a bank account for at least the minimum amount due. This will take forgetfulness out of the equation.
Doing a Cash Advance
As mentioned previously, cash advances are very expensive thanks to high fees and interest rates that take effect immediately. They also tell your issuer that you are desperate for funds. Basically, they should be avoided at all costs.
Exceeding Your Credit Limit
If you decide to opt-in for the ability to exceed your credit limit, you must only allow your spending to surpass it in the case of a true emergency because it will hurt your credit standing.
Spending Beyond Your Means
If you spend more than you can afford to pay, you’ll end up in debt, paying high interest costs and damaging your credit standing.
Paying Less Than the Minimum
Credit card companies make no distinction between payments below the minimum required and no payment at all, meaning a payment less than the minimum does not stop the advancement of delinquency. Therefore, if you don’t have enough to make a minimum payment, you should contact your credit card company and see if you can work out an alternate payment plan.
Failing to Pay Off Store Card Debt
Store cards often provide attractive deals and discounts, including 0% introductory APR offers. However, some of these offers come with a deferred interest clause that will retroactively apply interest to your entire original purchase amount if you are late or miss a payment.
Store credit card offers typically have high interest rates as well, with an average APR of 30% compared to the average APR of 22.9% for traditional credit card offers. So, if you carry a balance on a store card for too long, the savings it provided you will be effectively erased.
Having a High Credit Utilization Ratio
Credit scoring agencies use a balance-to-available-credit ratio called credit utilization as part of their credit score calculations. Therefore, spending most or all of your available credit will have a detrimental effect on your credit standing.
Most Common Credit Card Debt Mistakes
Paying Unnecessarily High Interest
Not only should you try to pay off your balance in full each and every month, but there are steps you can take to ensure you’re getting the best possible interest rate. For example, you could apply for a 0% credit card or consolidate your debts.
Assuming Balance Transfers are Just for Credit Card Debt
In theory, you can transfer any type of debt to a balance transfer credit card. That doesn’t mean you should transfer your student loan balance or mortgage, but it could help you save on the remnants of your auto loan or get rid of a payday loan.
Failing to Account for Payment Allocation
If you carry multiple balances on a single credit card (e.g. you made a balance transfer) only the amount of your payment above the required minimum will be applied to the balance with the highest interest rate. So, in order to minimize your interest costs, you should try to pay as much as possible above the minimum each month until the balance with the highest interest rate is paid down.
Ignoring Your Problems
Most credit problems (e.g. debt, delinquency, etc.) get worse when left alone, so it’s in your best interest to directly address any such problems as quickly as possible.
Not Knowing Your State’s Statute of Limitations for Debt
The statute of limitations for credit card debt is the time during which debt is relevant under the law. Once it expires, any lawsuit brought to recoup money that you owe will be dismissed, as long as you make it clear to the court that this debt is “time barred.”
Most Common Identity Theft & Fraud Mistakes With Credit Cards
Using a Debit Card for Increased Fraud Protection
Some folks mistakenly believe that debit cards protect them from fraud better than credit cards. However, all credit card transactions are covered by $0 fraud liability guarantees, while only signature debit transactions are guaranteed of that.
In addition, credit cards make fraud easier to deal with since you don’t have to actually pay out of pocket for purchases until the end of the month. With debit cards, funds are withdrawn from your bank account immediately.
Not Filling Out the Tip Field on Receipts
You can file this one under “leave no room for doubt.” Basically, you want to fill in the tip field on a receipt – even if it entails just writing $0 – because this will make it harder for someone at the restaurant to inflate your total in order to pocket some extra cash.
Not Ordering Free Credit Reports
It is every consumer’s right to receive a copy of each of their major credit reports once every 12 months. Failing to take advantage of this opportunity is a big mistake because obtaining your reports gives you a chance to analyze your files for errors related to your credit card and loan accounts, signs of fraudulent accounts, and indications of credit score improvement.
It’s best to order one of your three major reports every four months in order to keep constant tabs on your finances. You can also check your TransUnion credit report and your credit score for free on WalletHub as many times as you please.
Assuming Credit Reports Are Correct
Credit bureaus are mistake-prone. Depending on which piece of research you listen to, anywhere from 5% to 90% of credit reports contain errors. According to the Federal Trade Commission, 1 in 5 people have a mistake on at least one of their three major credit reports.
That means you need to take advantage of your right to free annual credit reports and analyze your files for errors. You might find a mistake that is unfairly costing you money or preventing you from getting approved for a better credit card.
Sending Credit Card Info Via Email
You never want to transmit sensitive financial information over unsecure online channels. This includes entering payment information into non-https websites and relaying account details via email or text message. Such practices leave you susceptible to the information being stolen and the resulting inconvenience.
Not Taking Other Common Sense Steps to Safeguard Your Finances
Shredding financial documents, regularly reviewing account statements, locking your mailbox when on vacation, and changing your account passwords are all examples of easy steps that you can take to better protect your financial life.
Most Common Business Credit Card Mistakes
Assuming Business Isn’t Personal
Many small business owners assume that business-branded credit cards protect them from personal liability for unpaid debts. That is not the case as all of the major card issuers hold small business owners personally liable. That’s why they ask for your Social Security number when you apply.
Overestimating the Importance of Your Company’s Credit Standing
Since you’re held personally liable for a business credit card, the particular card you qualify for depends more on your personal credit standing than that of your business.
Carrying Debt on a Business Credit Card
Business credit cards are not covered by the CARD Act provision that makes it illegal for credit card companies to apply increased interest rates to existing balances. Therefore holding debt on a business credit card is risky and can result in suddenly increased costs as a result of a credit card company raising its interest rates in order to quickly increase profits.
Not Using a Business Rewards Card
As ill-suited to funding as business credit cards are, they are just as useful for everyday spending. Not only do they provide lucrative rewards in business-specific expense categories, such as office supplies and telecommunications services, but they also offer extremely helpful expense tracking features as well as the ability to set custom spending limits for employees and then earn rewards on their transactions.
Using a business rewards credit card is therefore a must for transactions that small business owners can pay for in full within the month.
Failing to Reimburse Your Business for Personal Spending
If you ever use one of your business credit cards for personal reasons, make sure to repay the company for your spending. Otherwise, you’re playing with ethical fire and creating some potential tax problems, since a company bank account is likely paying the bill.
Most Common Credit Card International Usage Mistakes
Converting Hard Currency
Converting hard currency at a local bank or an airport Travelex location is a bad deal. Visa and Mastercard actually offer the best exchange rates, and you can save more than 9% by just buying things with a no foreign transaction fee credit card while abroad. Also taking a debit card that charges low international ATM withdrawal fees will also enable you to access local cash as needed while still saving on currency conversion.
Falling for Merchant Tricks
Foreign merchants often offer to covert purchase totals into U.S. dollars, allegedly for convenience sake. However, they typically charge inflated conversion rates for the service, so make sure to only sign checks and receipts denominated in the local currency.
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